In 1944 the Bretton Woods system was established for the economic expansion of the post-1945 era. The implications of this system for the U. S were that it was given a managerial role of the Bretton Woods system, and a role that would be accepted by the world that the U. S would be the new hegemon. But, like it brought the U. S into power it will also bring it into decline by 1971, with the end to the Bretton Woods system. In 1944 the leaders of the Capitalist West met at Bretton Woods, New Hampshire, to discuss the needs of a new system that would be a reliable mechanism to determine the value of one countries currency with another’s. This new international monetary ‘system’ known as the Bretton Woods system would be concerned with the mechanisms of governing the interaction between trading nations, and in particular between money and credit instruments of national communities in foreign exchange, capital, and commodity markets. As a result, the Bretton Woods system established three new organizations to aid this new system in its post world reconstruction.

The first was the International Monitory Fund (IMF); it was established to “help states maintain equilibrium in their balance of payments and stability in their exchange rates with one another”. The second was the International Bank for Reconstruction and Development (also known as the World Bank); it was “to be an instrument for channeling long-term loans from largely private sources into war-torn industries and newly developing industries”. And finally the General Agreement on Tariffs and Trade (GATT); was created as an “international organization affiliated with the United Nations that promotes international trade and tariff reductions”. Therefore, we see that the Bretton Woods system would play a key role in the economic expansion of the post-1945 era.

For 25 years after World War II, the U. S was proposed to have a managerial role of international trade affairs. The international monetary system was based on fixed exchange rates. By signing the agreement of Bretton Woods in 1944, nations were submitting their exchange rates to international disciplines. This amounted to a significant surrender of national sovereignty to an international organization.

The “U. S dollar became the key to the hegemonic role that the U. S eagerly assumed as manager of” this new international organization. Therefore, the United States formed the central foundations of the post-war international system. As a result, the American dollar functioned as a virtual world currency; as in a “fixed exchange regime, a single currency acts as the effective anchor in that, in practice, parities are fixed with reference to hegemonic currency”. These advantages were however limited, at least in theory, by the provision that the U. S dollar could be redeemed in gold at the rate of $35 per ounce. The Bretton Woods agreement “sought to change the basic operating principles of the international gold standard”.

As the U. S assumed they could benefit from this. So, we see that in the period immediately following World War II, as the U. S became the world’s new hegemon, it also became the manager of international trade affairs. However, the power implications this system gave to the U. S was in decline. It was the dominant world power straight after World War II.

So, from 1945 to the late 50’s over half of all international money transactions were financed in terms of dollar; the U. S produced more than half of the world’s output. Consequently, during the 50’s the U. S emerged as the leading reserve country, and the dollar increasingly taking over the function of gold as a major international reserve asset. Most countries preferred the dollar to gold to manage their balance of payments also, to earn interest in their savings account, whereas, gold could not do this. So, “as early as 1960 it was clear that the dollar’s top currency status could not be sustained by U. S hegemony” any longer.

And as the years passed by the U. S’s power was in decline and therefore, the Bretton Woods system was closer to an end. Therefore, Increasing pressures in the 1960’s and the increasing U. S deficit, culminated in the collapse of the Bretton Woods system. There are 5 main implications why the U. S fell in deficit. The first implication was due to trade; as U. S exports were becoming less competitive in the world market because Western Europe and Japan were recovering. Therefore, there was a registered trade deficit, as the U. S was importing more than exporting. The second implication was the decline of productivity in the U. S; this was due to the smaller demand for products.

The third implication was Foreign aid, as the U. S saw itself as a guardian of the economy and free trade market it spent huge amounts of money on it. Fourthly, there was very little capital coming in from capital outflows. And finally, the huge amount spent out of U. S on Military expenses. Therefore, due to the accumulated U. S deficit, pressures since the 1960’s made it inevitable for the Bretton Woods system to collapse. So, by 1971 Nixon announced that the U. S would be removing tht gold backing from the dollar. Therefore, the very economic expansion of the Bretton Woods system the U. S helped to produce brought them to the surface and eventually led to the fall of the regulated post-war order.


John Baylis and Steve Smith, The Globalization of World Politics: An Introduction to International Relations, Oxford; New York: Oxford University Press, 2001.

Charles W. Kelley, Jr., Eugene R. Witt kopf, World politics: Trend and Transformation, Boston: Bedford / St. Martin’s, c 2001.